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Basics explained: Know your fixed deposits

Bank deposits are one of the most preferred investment options in India. It is consider safe and not risky, especially in comparison with the stock markets and mutual funds.

Here are 10 things you need to know about term deposits:

1. Types of deposits: There are two key types of term deposits – fixed deposits and recurring deposits. A fixed deposit is where you invest all your money at one-go. A recurring deposit, on the other hand, is when you invest your money in installments.

2. Fixed return: When you opt for a term deposit, you are parking your funds in a particular bank deposit for a fixed period of time. In exchange for holding your money for a longer period of time, banks offer you to pay a fixed interest. This makes a term deposit a very safe option. This interest payment acts as your profit from the investment. Also, senior citizens usually get a higher interest. Currently, fixed deposits offer interest rates up to 10.25%. Recurring deposits usually offer a lower interest rate than fixed deposits.

3. Tenure of your choice: Term deposits come with a variety of tenures – the amount of time the money is held with the bank. This could be as short as 7 days and as long as 10 years.

4. Interest payout: You can decide when you want your interests to be paid. This can be done at the end once the deposit matures. If not, you can opt for regular interest payments on quarterly, half-yearly or annual intervals. Some banks also offer you a choice to reinvest your interest payments.

5. Longer the duration, higher the return: Term deposits offer a wide variety of interest rates. It changes with the duration of the deposit. Greater the duration, larger is the interest rate offered. This is to attract investors to deposit money for as longer a time as possible. Also, the bank pays interests regularly. Over a period of time, this money can either be reinvested in the same deposit or saved in your bank account. This would earn you additional interests, thus increasing your total return.

6. Cheaper borrowing for banks: Banks usually borrow money to give out as loans. The interest payments on loans by borrowers are banks’ key source of income. Banks can borrow from other banks and the Reserve Bank of India. However, these have restrictions are considered costlier. The money you deposit with your bank, on the other hand, acts as a source of cheap borrowing for the bank. However, the money in the savings accounts could be withdrawn any moment by depositors. This increases risks for the banks. For this reason, banks actively try to attract deposits to invest in term deposits. This is because, the amount in deposits are unlikely to be touched for a longer period of time.

7. Breaking a deposit: The only rule of a term deposit is that once you deposit, you cannot touch this money. If you wish to reclaim your deposit amount, you will be fined a particular sum or your total interest payment may be reduced. Sometimes, banks may only allow you to withdraw the money after a certain minimum period. Ensure you get these details before investing.

8. Overdraft against your fixed deposit: If you are in desperate need of liquid cash, and you have withdrawn all of your funds in your bank accounts, you can borrow on the basis of your fixed deposits. This is called the overdraft facility. However, there is a limit to how much you can borrow under this service. Moreover, it may not be interest-free. Check with your banks before opting for the facility.

9. Taxation of deposits: Interest payments on fixed deposits are taxable. This depends on your overall income tax bracket. For example, if you fall in the 20% income tax bracket, your interest payments would be taxed at the same rate. This is why fixed deposits are usually not preferred by those in the 30% bracket. Also, if your total interest payment in a year exceeds Rs 10,000, then the bank cuts 10% as tax deducted at source (TDS). However, if you submit the Form 15G/H to the bank stating you have no taxable income, then the bank will not deduct TDS. You can also split your term deposits across banks to ensure the interest does not exceed Rs 10,000 in a single bank.

10. Tax savings: Banks offer fixed deposits for tax-saving purposes. The amount you save in such deposits can reduce your total taxable income, and thus help you save taxes. Tax-saving deposits have a minimum tenure of 5 years and a maximum of 10 years. The government has also capped the maximum amount you can invest in such a deposit for tax purposes to Rs 1 lakh per year. However, the interest you earn will be taxable.